1. Chapter 16 Intermediate Accounting II Otto Chang Professor of Accounting

2. Accounting for Cash Dividend On the date of declaration Retained Earning (or Dividends Declared) XXX Dividends Payable XXX On the date of payment Dividends Payable XXX Cash XXX

3. Accounting for Property Dividends At declaration: Investment in Securities XXX Gain on Appreciation of Securities XXX Retained earning(Dividends Declared) XXX Dividends Payable XXX At distribution: Dividends Payable XXX Investment in Securities XXX

4. Accounting for Scrip Dividends Companies decided to pay dividends in the form of a note payable –At declaration: Retained Earning XXX Notes Payable to Stockholders XXX –At payment: Notes Payable to Stockholders XXX Interest Expense XXX Cash XXX

5. Accounting for Small Stock Dividends Small stock dividends (<20% -25%) –At declaration: recorded at market value Retained Earning (or Dividends Declared) XXX Common Stock Dividend Distributable XXX Paid-in Capital in Excess of Par XXX –At distribution: Common Stock Dividend Distributable XXX Common Stock XXX

6. Accounting for Large Stock Dividends Stock dividends > 20%-25% (a split-up effected in the form of a dividend) –At declaration: recorded at par value Retained Earning (or Dividend Declared) XXX Common Stock Dividend Distributable XXX –At distribution: Common Stock Dividend Distributable XXX Common Stock XXX

7. Liquidating Dividends Companies distribute dividends when there is negative or zero retained earning (a return of contributed capital to shareholders) –At declaration: Additional paid-in Capital XXX Dividends Payable XXX –At distribution: Dividends Payable XXX Cash XXX

8. Stock Split To decrease the share price to encourage general public to own the shares No journal entry is required A memorandum note of the increase in the number of shares issued and the decrease in par value is made Unlike large stock dividends, the total par value of the stock remains unchanged

9. Dividend Preferences for Preferred stock Cumulative: entitled to dividends in arrears Participating: entitled to additional dividends after the common stockholders are paid certain minimum dividends Fully participating: after the preferred dividend are paid, common shares receive a “like” % of par value. The remainder of dividends is shared in proportion to par value dollars in each class of stock.

10. Example of Distribution: Cumulative & Fully Participation Total Dividends Declared: $50,000 Common stock par value: $400,000 6% preferred stock par value: $100,000 Preferred dividends in arrears for two years Preferred Common Dividends in arrears $12,000 Current year, 6% 6,000 $24,000 Participating dividends, 1.6%* 1,600 6,400 Total Dividends $50,000 = $19,600 + $30,400 *1.6% = ($50,000 - $12,000 - $6,000 - $24,000)/$500,000

11. Appropriation of Retained Earning A reclassification of Retained earning for a specific purpose In theory, appropriated retained earning is no longer available for dividend Journal entry: Retained Earning XXX Appropriate Retained Earning XXX When the specific purpose disappear, the above entry is reversed

12. Financial Statement Analysis Rate of return on common stockholders’ equity = (Net income - Preferred dividends) / Average common stockholders’ equity Pay out ratio = Cash Dividends / (Net income - Preferred dividends) Price earning ratio = Market Price of stock / Earnings per share Book value per share = Common stockholders’ equity / Outstanding shares